BusinessCorporate FinanceBP’s record profits suffer IFRS volatility

BP's record profits suffer IFRS volatility

Standard made oil giant's earnings more volatile in Q4

BP’s record profits suffer effects of IFRS volatilityBP may have reported
record profits of $22.3bn (£12.7bn) last week, but the strong results of the
FTSE100’s largest company were overshadowed by the distraction of IFRS.

As a global oil company, BP is exposed to unpredictable oil prices and
currency fluctuations in various geographies. In order to manage these risks,
the oil giant enters into long-term sales contracts for its oil and gas, and
sets up a range of hedges to protect it against volatility in prices and
currencies.

Ironically, the new standards actually cause volatility because BP has to
mark to market all embedded and financial derivatives, but is unable to account
for economically matched transactions as hedges. As a result, there is an
asymmetric treatment for different parts of the same economic event.

The evidence of this volatility was illustrated when BP released comparisons
between its third-quarter and fourth-quarter profits for 2005. The group’s
fourth-quarter profits of $3.6bn were 43% lower than the third quarter, as a
result of IFRS.
‘Accounting under IFRS has made our reported earnings more volatile, as we saw
in Q4,’ said BP’s CFO Byron Grote.

‘It is not possible to accurately estimate all of the impacts in advance of
the quarter close.’

These issues have affected a number of companies and IASB chairman Sir David
Tweedie has said that users need to take a more advanced approach.

‘The volatility caused by IFRS is detailed on a line-by-line basis, so users
can see where the volatility is coming from. Users need to adopt a more
sophisticated approach when reading accounts,’ he said.

COMPANY REPORTS

FTSE100
Rolls Royce finance director and chartered accountant Andrew
Shilston could be in line for a windfall, after the aerospace giant said it
would allow payouts on share options to be vested for the first time in 10
years. While it is unclear what some executives will do with their options,
information published by the company shows that Shilston held almost 128,000
company shares, which at the current share price of 431p equates to £8.5m.
Directors will be able to exercise options worth a total of £10.3m next month.

Europe’s biggest drug manufacturer GlaxoSmithKline faces a
row with the US tax authorities over a $12bn (£6.9bn) tax bill. GSK is about to
be hit with a new bill from the Internal Revenue Service of $4bn, bringing the
amount under dispute to $12bn. The group said it expected to receive further
‘substantial claims’ from the IRS in relation to the way it records profits at
its US subsidiary.

United Utilities group FD Simon Batey is set to quit the
business after six years in the role. Batey leaves United Utilities on 31 July
after the conclusion of its year-end and AGM, but has not revealed his future
plans. ‘He has established a firm financial foundation for the company, and was
the architect of the innovative two-stage rights issue which raised £1bn for
investment in the business,’ said chairman Sir Richard Evans. Batey joined
United Utilities from Amec, where he also served as group FD.

Probes into the relationship between under-fire caterer
Compass and the United Nations are to continue after the US
Congress refused to accept the findings of the company’s own internal
investigation. Eurest Support Services is accused of using leaked details of UN
tenders to win contracts. That investigation is now complete and, though it
uncovered ‘serious irregularities’ in the dealings at ESS, the group
revealed that the problems were limited to just three employees, including the
former head of the subsidiary, Peter Harris. At Compass’ AGM last week, the
group said trading in the first four months of the year was in line with
expectations, and that the company was now on track to deliver cost savings of
£50m.

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